Commissioner for Inland Revenue v Sunnyside Centre (Pty) Ltd

• Jurisdiction: South Africa
• Judge: Schutz JA, Van Heerden JA, Kumleben JA, Howie JA, Schutz JA, Scott JA
• Judgment Date: 20 September 1996
• Citation: 1997 (1) SA 68 (A)
• Docket Number: 86/95
• Hearing Date: 02 September 1996
• Counsel: P C van der Byl SC (with him L J Bekker) for the appellant A G Derksen for the respondent
• Court: Appellate Division

Schutz JA:

The Gross brothers, Solly and Mervyn, are the controllers of Sam Gross Holdings (Pty) Ltd ('SGH'). They exercise control over SGH and its subsidiaries in an informal manner, sometimes acting on the advice of their auditor, Du Preez. Two J wholly-owned subsidiaries,

Schutz JA

A the respondent, Sunnyside Centre (Pty) Ltd ('Sunnyside') and Agros (Pty) Ltd ('Agros'), own fixed property in Pretoria. The brothers are the sole directors of all three companies.

Since 1955 Sunnyside has owned a building in Esselen Street, Sunnyside. It consists of shops and flats which are let out. Agros owns a building in Prinsloo Street. The land B was acquired in 1945 with a dilapidated butcher shop on it. Improvements were effected in later years, and, like the Sunnyside property, it produces rent. In 1981 a vacant stand next to the Prinsloo Street property came onto the market and Agros bought it at a cost of some R295 000. It was zoned for business and commercial purposes. Initially resort was had to the bank for bridging finance. Offering the Agros properties C for security, application was then made to the Allied Building Society for bond finance. Difficulties were encountered in obtaining a bond, as it later transpired, because there was then a freeze on building societies lending on the security of commercial properties.

D Although Agros could itself have raised a loan on the security of its property but at a rate of interest higher than the building society rate, the Gross brothers decided to borrow at the lower rate, by using Sunnyside's property as security and with it as the borrower. This was possible because its property was partly residential. Accordingly E Sunnyside borrowed R209 826 from the United Building Society ('UBS'). A first bond for R150 000 and a second for R59 826 were registered against its property. The proceeds of the bonds were paid to SGH - in the sum of R18 345 as repayment of an existing indebtedness, and the balance as an interest-bearing loan, which was to be used by SGH to lend to Agros at interest, in order to fund its property acquisition. This F was done. The usual informality prevailed. Nothing was reduced to writing, and no agreement was reached as to the rate of interest and terms of repayment between Sunnyside and SGH.

However, it was intended that eventually SGH would pay Sunnyside all the interest it G had had to pay, and repay the capital sum in full. Sunnyside was not to suffer any loss as a result of the transaction. Whether, in addition, it was to gain from it will be discussed below.

A feasibility study had been done by Du Preez. The contemplation was that it would take some years before rentals on the Agros property could be raised to a level that H would match the interest burden. Later, it was planned, the rentals would exceed interest, so that, looking at the group as a whole, in the earlier years there would be a loss, to be succeeded by a profit.

Expectations were bedevilled by record high interest rates in the early period, but after some years deficit was in fact followed by surplus. This situation may not have been I reflected exactly in the differential between the interest received by SGH from Agros on the one hand, and paid to Sunnyside on the other. Nonetheless each year the Gross brothers would decide on charges in consultation with Du Preez, and, broadly speaking, the interest charges reflected the anticipated swing of the wheel. Of course, J what Sunnyside had to pay the UBS was unrelated to its interest receipts, so that there was a

Schutz JA

A discrepancy between what Sunnyside paid and received in each year, as is revealed in the following table:

Tax year	Interest paid to UBS	Interest received from SGH
1983	R34 933	R11 641
1984	36 658	12 000
1985	41 557	17 669
1986	41 021	14 535
1987	34 160	22 540
1988	27 819	47 320
1989	±27 000	± 31 000

Initially the appellant ('the Commissioner') allowed Sunnyside to deduct in full its payments to C the UBS, but he then reversed his stance in respect of the years 1984, 1985, 1986 and 1987, and allowed as a deduction only so much as Sunnyside had itself received as interest. This involved revised assessments for the 1984 and 1985 years. D Looked at in commercial terms, the Commissioner ignored the swings and roundabouts of the longer term, and insisted that each tax year be judged separately. This appeal is concerned with the correctness in law of his stand as to how much interest may be deducted in respect of each of the four years mentioned. Both the Transvaal Income Tax Special Court and the Full Bench of the Transvaal Provincial E Division have held in Sunnyside's favour. The decision of the latter is reported as Commissioner for Inland Revenue v Sunnyside Centre (Pty) Ltd 1993 (3) SA 940 (T).

Two complementary sections of the Income Tax Act 58 of 1962 are relevant. Section 11(a) provided: F

'For the purpose of determining the taxable income derived by any person from carrying on any trade within the Republic, there shall be allowed as deductions from the income of such person so derived -

(a)

expenditure and losses actually incurred in the Republic in the production of the income, provided such expenditure and losses are not of a capital nature; G

. . . .'

Section 23(g) provided:

'No deductions shall in any case be made in respect of the following matters, namely -

. . . H

(g)

any moneys, claimed as a deduction from income derived from trade, which are not wholly or exclusively laid out or expended...